When buying a business there are some dos and don'ts that you should always keep in the back of your mind.
- Do not buy or invest in a business that you do not understand or are not familiar with. This does not mean that you have to know every detail of the management and operation of that specific business. Hopefully, you will receive specific training from the current owner. What it does mean is that you should, at the very least understand the primary principles of the business. We all understand the principles behind a retailer; buy product that appeals to the consumer at the lowest possible price and sell it at the highest price possible while maintaining the lowest overheads – simple!
But, if the business you are considering is in the disposal of toxic waste, understanding the basic parameters of how the business operates and hence makes a profit could be completely foreign to you. The current owner of any business that is listed for sale will always tell you that running the business is relatively easy. It probably is relatively easy for the seller; he has had many years of experience to make it easy.
- The complexities and timing of the transferring of knowledge from the seller to the buyer is relative to the type of business that is being acquired. A business that is very seasonal should have a minimum of one full year of support from the seller in order to learn what occurs and how to manage and operate the business with each and every season. Make sure that you have an agreement on how and when the support and transferring of the seller’s knowledge will take place. As an example, will you require that the seller be available some evenings and/or weekends? Is the seller planning on taking a three-week vacation in Europe the day after closing?
- A business that is based on a trade such as an electrical or plumbing contractor may also require additional formal education, licenses and/or certification. Businesses such as real-estate brokers and insurance agents also require licenses in order to operate. In some cases it is the business that must have the license in order to operate, in other cases it is an individual that holds the license on behalf of the business. If it is an individual who holds the license you should have a back-up plan in the event that license holder can no longer accommodate your needs.
- A lot of sellers will require that you give a “good faith” deposit prior to turning over any or all of the due diligence documentation, material and information that you request and require. Any deposit you give should be 100% refundable if the deal is not consummated. Ensure that the deposit agreement covers the full refund of the deposit. The deposit should not go directly to the seller but should be held by the business broker or preferably an attorney.
- Be careful when entering into confidentiality and nondisclosure agreements. If you have your heart set on acquiring or opening a hardware store, and you sign a confidentiality or nondisclosure agreement with a prospective hardware business you may find yourself with a serious problem if you decide not to acquire that hardware store and acquire a different one or start one on your own. At some point you could be accused of utilizing the information that you obtained under the confidentiality or nondisclosure agreements to enhance the other business.
- If there is a business broker or other intermediary involved in the transaction always verify which party is paying the broker’s commission, the seller or the buyer. Usually the seller pays the broker’s commission, however this is not cast in stone.
- Have an understanding about who is paying the seller’s legal expenses to consummate the deal. The seller may have paid a retainer and or portions of the fees from the company’s accounts prior to the transaction, which in fact means that if you do acquire the company that you are in fact paying those fees. This is a very key item when investing in a business as a silent or active partner. It is highly likely, if not pre-arranged, that the business that you are investing in will pay the current owners legal expenses and you will end up paying your legal expenses out of your own pocket. An agreement can usually be reached that on consummating the investment that the company will reimburse your legal (professional) expenses or in the least reimburse a portion of them.